Part II of Stockwatch report
Share Impact and Evaluation
As should be clear from the above discussion, we consider the present results very positive for
Winspear, as they strongly suggest that the original two mini-bulk samples were collected from
sites representative of the rest of the body. The new data make it clear that the diamond
populations in the mini-bulk samples, and the body as a whole, are completely compatible. The
larger diamonds recovered during the caustic fusion yield a grade of at least 1.45 carat/tonne,
similar to that in the higher grade of the two original pits.
We therefore feel it is likely, Winspear's caution notwithstanding, that this year's planned 6,000
tonne bulk sample will yield grades in the 1.1 carat/tonne range or possibly higher. The main
uncertainty is that of value - clearly results similar to those for the original 226 carats would be
very positive. As we discuss above, however, any value over $170/carat should generate an
acceptable return even assuming unit mining and processing costs approximately 50 per cent
higher than those assumed in Winspear's scoping study, and about double those realized at the
nearest (former) operation, the Lupin mine of Echo Bay. This includes includes initial capex of
$230 MM (U.S.) for a 3,000 tonne/day rate (vs. the company's figure of $63 MM for 1,000
tonnes/day), and sustaining and expansion capex of over $110 MM life-of-mine (vs. $3 MM
based on the company's figures).
If we accept the $301/carat at face value, along with operating costs in line with the company's
estimates, we estimate an NPV for Winspear's share of the project of $780 MM (Canadian), or
$17.35/share (using an eight per cent discount rate). This is based on mining a total of 14 MM
tonnes through 2015. With $175/carat and operating costs about 35 per cent higher, our
estimated NAV falls to just under $5.00/share.
If we look for a 2003 start-up, and discount these NAV's back to 1999 at 15 per cent, we get a
range of values between $3.70 and $10.75 for Winspear. On this basis we see that, even at its
highs, Winspear's share price has always discounted the lower end of this range. Given the
uncertainties in the grade of the kimberlite and the diamond value wefeel that this was
appropriate. However, with the new data suggesting that the grade has a good chance of being
maintained we feel quite comfortable with the current valuation. If the results of this winter's bulk
sample program support a higher value than $200/carat then we see the potential for Winspear
to appriciate significantly. We do see some hurdles ahead for the company, however, as the
special nature of the deposit may make financing unusually difficult.
The Trouble with Diamond Deposits
The difficulty we foresee for Winspear (and partner Aber) is in establishing an estimate of
mineral inventory that will meet the needs of possible lenders. To drill out the kimberlite and
prove tonnage should be no problem - in fact easier than for many types of ore deposits. We
suspect that with additional data it may even be possible to predict diamond grade within
acceptable limits based on caustic fusion data from drill hole samples. The missing link could be
the diamond value. We see no way for Winspear to establish the value of the diamonds (to a
bank's satisfaction) without a substantial underground program which would sample the body in
several blocks. This has implications for timing of development as well as financing needs (and
therefore dilution). We believe that the earliest an underground program could begin is early
2001, given the requirements of permitting. Allowing for a nine month program, followed by
three months of sample processing, the results would be known in early 2002. Such a program
would likely cost in the region of $20-$25 MM (Canadian) - requiring WSP to finance
apporoximately $15 MM - money it would have to raise. To complete a project feasibility study,
arrange financing, and obtain permits is likely to take a minimum of two years (bringing us to
2004). Assuming that everything fell into place to allow mobilization of equipment over the winter
road during the 2003-2004 season, the earliest we would forecast production (from an initial
open pit) is early 2005.
Other possible routes exist, however. Winspear might opt to begin feasibility and permitting for
an initial small-scale (say 1,000 tonnes/day or less) open pit operation (assuming the current bulk
sample yield positive results), and run the evaluation of the larger, underground portion of the
deposit in parallel with that effort. While this would not materially shorten the lead time to a
decision on developing the larger part of the deposit, it could yield some cash flow during a
critical period, as well as provide additional confidence on the continuity and grade of the sill.
Even in this situation, however, the company might not be self-financing (unless the very high
diamond values are maintained), and so some dilution of current shareholders may be
unavoidable.
Conclusion
We have liked the potential of Winspear's Snap Lake property since we first saw the diamond
grade and values about six months ago. The missing data to let us fully assess the project was
mainly the microdiamond results from the mini-bulk samples. We now have those data which
strongly suggest that the kimberlite in the mini-bulk samples was typical of the main northwest
dike, and that the other dikes at Snap Lake also contain similar populations of fine diamonds.
In our opinion this indicates a good likelihood that similar (ca. 1 carat/tonne), or possibly even
better grades, will be found in the 8,000 tonne bulk sampling period planned for this winter. The
main uncertainty would then shift to diamond value - the previously obtained $301/carat is
among the highest valuation ever obtained, and we question whether such a value could be
maintained. As long as the value comes in over about $170/carat we estimate that an acceptable
return of investment is possible, however, and if the grade upside we suspect does materialize
this threshold value could drop to the $150/carat range. Other (Group 2) fissure kimberlite
deposits in Africa do reach or exceed these values, so unprecedented high values are not
needed.
In the long term we do have a major concern that the time lag to production and some of the
unique challenges in financing this deposit could weigh on the stock. Even if an economic deposit
does emerge, Winspear may follow the traditional trajectory of a rising share price during
exploration/delineation, with a possibly long dull period leading up to production.
Recommendations
Winspear has advanced Snap Lake to the point where the play has to be taken seriously. The
future is in the numbers - the grade from this year's bulk sample, and equally important the
diamond values. With grade and value equating to about $185/tonne or greater we see a good
probability of a mine. We feel that the available data make such a value likely. Until these data
are in Winspear remains a speculative stock, but in our opinion one of the best high-risk,
high-reward plays in the junior market. We rate Winspear Outperform (Speculative).
(c) Copyright 1999 Canjex Publishing Ltd. canada-stockwatch.com
old url (better for printing) |
